May 01, 2005

Fueling the Bubble

The Seattle Times is running a pair of stories today under the headine "Flipping real estate ... without getting burned" -- a reference to the growing American practice of buying property with the intention of immediately reselling it for a profit.

The "without getting burned" part of the headline in the printed newspaper is in a much smaller type size than the first part of the headline. That difference in emphasis is a metaphor for the problems with this package of stories and current "journalism" on real estate in America.

The Seattle area is not quite as overheated a market as California. Still, it's plenty hot. People here and other such cities are flipping homes like crazy to take advantage of what they see as a route to quick and painless wealth.

It'll work for some. Yet this game is a classic bubble activity: depending on the greater fools who'll take the losses when the music stops.

The newspaper's stories have the usual caveats. But in my view they don't offer the level of strenuous warning that they should.

What we need are news articles about the people who lost money in previous bubbles resembling this one, such as in Japan in the 1990s, and Houston in the 1980s. What we're getting is, in effect, encouragement to join the crowd that's inflating a new bubble, more dangerous by far than even the stock bubble of the late '90s.

Why more dangerous? Because the buyers now are being inveigled by lenders who offer nothing-down and interest-only loans, to borrowers who would not have come close to qualifying for loans in a less frothy time.

The LA Times, meanwhile, has a story (reg req) today about Latinos in the booming southern California real estate market. In an anecdote about one family's successful "purchase" the paper writes: "After two months of shopping for a mortgage they could afford, they qualified for two loans that required no down payment. Their savings covered the closing costs and they moved into the house in September."

It's obviously a good thing for more people from more diverse backgrounds to be building equity via home ownership. But this kind of risk could put these people in the financial hole forever, if the bubble bursts now and they find themselves under water on a nothing-down loan.

It was less than 2 years ago, and hardly sounds like a "recommendation". More like a "rumination". Especially since Dan wasn't definitely calling it a "bubble" at that point.

"Prices would have to fall about 50% for people to lose what they've gained by ignoring the siren song of media scaremongers."

Not even close. In fact, prices don't have to fall at all for recent buyers to lose out: the costs of selling and moving mean that the typical homeowner needs an appreciation of 7-10% to break even. So even those who actually have seen that 50% appreciation would only need a 20-25% drop for their paper profits to vanish.

But, even without allowing for costs, the actual number should be 33%, not 50%.

I do hope you can appreciate the irony of an "anti-bubble" argument that's based on bad research and even worse math...

Ran, a more ridiculous and confused retort to Bill's postings, I could not imagine.

You have *not* accurately cited Dan's first shrill warnings of a housing bubble. His long-term readers know it. He even acknowledges the length of his history warning of a housing price collapse, in THIS very thread.

If you ignored him and his fellow mainstream media scaremongers from the beginning, and made major investments in Bay Area real estate on the heels of the Clinton-Gore NASDAQ collapse of 2000, you'd have gained 50% in the asset value your real estate.

It's so ridiculous, to see you challenge these numbers as bad math. In fact, if you accounted for financial leverage, considering gains in *equity* value, wise investors who tore up Dan Gillmor's (and other's) columns back then, have tripled their invested equity or better. 300%+ returns.

You distort Dan's argument, and Bill's vociferous criticism of it, by pointing to "recent buyers". Dan has not primarily warned that real estate is thing to get into today. He's making the claim that you should GET OUT, the same claim he's been making back to 2000 and before.

That advice, so ridiculous back then, indeed could have cost people who stayed out of real estate over this period, taking Dan at his word, day-after-day, hundreds of thousands of dollars, 50% returns on asset value, and 300%+ returns on invested equity.

Dear "RanAway"
I think Ran's comments about bad research and bad math were not directed at Bill, but at my post, and my mention of Sornette's analysis of bubbles.

Beyond that ,there are several points that can be discussed. Many people are not buying a house as an investment, but as a place to live. If you are planning to stay in our house for >5yrs, and if you can hold on to your job without it disappearing due to outsourcing, age discrimination, mergers, downsizing, etc, then you can pretty much ride out any post-housing-bubble crash. Afterall, some property tax issues aside, the value of your house is irrelevant except on the day you buy, and on the day you sell. Even if the market value of your house were to decline severely, you can still live in it!
If you are buying real estate primarily as a means of investment (or speculation), then even if you believe there is a bubble, there is only one question you have to ask yourself: "do I feel lucky?"
Regards,
J.F.

Actually, Ran ran his mouth off at a couple of statements by Bill (beyond that, perhaps others).

Real estate *is* an investment, in a non-diversified asset class that receives outrageous subsidies from the government.

Taxpayers bleed out dollars, in the form of the mortgage interest deduction, affecting all, and in California, the Proposition 13 "cap" on the growth of assessed values, which skews benefits to older, stable Californians.

Tragically, these tax incentives accomplish nothing more than income transfers and reduced asset liquidity. If you are familiar with the most basic economic theory of tax incidence, you would know that. Although on these subjects, Ran and others demonstrate the worst kind of ignorance -- blind and infused with arrogance.

"Although on these subjects, Ran and others demonstrate the worst kind of ignorance -- blind and infused with arrogance."

Wow. This is the second thread I've read in a row in which someone who is, shall we say, not firmly grounded, accused someone else of being ignorant and arrogant. The mac guy can at least be forgiven; he probably believes it.

I have noticed, Mr. Away, that while you're quite adept at calling names, you seem to be severely lacking when comes to actually supporting your position. Are you capable of doing so, or is wrapping pejorative language around vacuous conceits the extent of your talents?

RanAway, if you're going to quote me, please do it accurately. First, the time frame of my warnings is not as long as you are suggesting. Second, I'm not telling people to get out. (I am telling them it's a huge risk to get in right now, especially on one of those hugely risky interest-only or no-down-payment loans that irresponsible lenders are pushing on people who shouldn't be doing this.

Your crack about the "Clinton-Gore NASDAQ collapse" (plus your tendency to call "ignorant" people who disagree with you, not to mentoin your IP address) suggest that you are our old troll, back to cause trouble. Don't test my patience.

"You have *not* accurately cited Dan's first shrill warnings of a housing bubble."

And you, as usual, have offered no evidence at all.

But, I do have to admit "ignorance" of any number system in which the assertion that "1.5 * .5 >= 1" is true. Perhaps you can enlighten us on this subject. It might offer a valuable explanation of why the Bushies' cost and benefit predictions keep turning out to be so horribly wrong...

As Bill Haught said, Ran Talbott has join Dan Gillmor in the kind of "shameless scaremongering" that has kept much of the lower middle class out of the greatest investment asset class of the new millennium.

Why does "Left of Center" always carry the baggage of utter economic befuddlement?

By the way, what's wrong with the term "Clinton-Gore NASDAQ Crash of 2000"?

Clinton and Gore were President and Vice President, and had been in office 7 years dominating public policy. The regulators at the SEC were their regulators. The leadership of the Federal Reserve was also Clinton-Gore. The heads of the multitude of bank regulators and mutual fund regulators were Clinton-Gore appointees.

Exactly what aspect of the bubble leading up to the crash of 2000 weren't firmly in the hands of Clinton and Gore?

Democrats for 40 years used the term the "Hoover Crash". They even called it the "Hoover Depression", even though the worst of the depression occurred on FDR's watch. In fact, following that precedent, the slowdown of the early 1970's would have been the "Johnson recession" 1980's would have been the "Carter recession", and that of the early aughts, the "Clinton recession".

Clearly, the rhetoric in the mainstream media is whatever works best for the Democrats. It was the "Nixon recession", the "Reagan recession", the "Bush recession".

Still, who doubts that if Real Estate collapses on the heels of a Hillary victory, that it will be the "Bush collapse" and the "Bush recession".

"Exactly what aspect of the bubble leading up to the crash of 2000 weren't firmly in the hands of Clinton and Gore?"

The most crucial one: the "irrational exuberance" that led people to borrow money so they could pay 1000 times projected 2027 earnings for a stock because the company had a website and a cute spokespuppet.

The Biggest Market Crashes in History: The Florida Real Estate CrazeInvestopedia.com - Your Source For Investing Education. Includes the most comprehensive investing dictionary on the web as well as articles and tutorials on ...
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10 years from today in Seattle, i will just bet you that the average price of a good house in a good neighborhood is at LEAST DOUBLE.
I saw several bubbles burst in Seattle. Big deal. Just hold on. What do i know.

10 years from today in Seattle, i will just bet you that the average price of a good house in a good neighborhood is at LEAST DOUBLE.
I saw several bubbles burst in Seattle. Big deal. Just hold on. What do i know.

I bought a house in a not yet gentrified neighborhood in San Francisco in 2000 -- the same day the tech stock market bubble popped. Inexplicably, my already overpriced, tiny 2 br/1 bath + rental cottage (with a bad foundation, dryrot galore, an old kitchen, a 60 year old bathroom, peeling paint, leaking roof and a stream of water continually running underneath it, increased by $300,000 in value over the next 5 years. At the same time, my ARM was also increasing at a glaring rate -- and I was now paying $800 a month more for my house than I did when I first bought it. Yet the rents I was able to collect on my 2 unit property were now decreasing. So I sold it -- and now people are saying I was a fool because my house continued to rise in value.

So this is what I ask all of you -- if interest rates rise, and people are paying more for their houses, yet rents start to decline...isn't their real estate essentially worth the same, or less -- not MORE than they paid for it? IF most Americans are now carrying two mortgages and have refinanced (which means that you lose the equity that you already paid into your mortgage and are back to square one, while you are "saving" some money on your monthly payment) aren't people actually now paying more for their "more valuable" house?

Also, if you pick up the free "Real Estate San Francisco" magazines, they are thicker than they've ever been this month -- and there is a LOT of inventory. I've been out looking at places to buy again with my agent, and most of the properties I saw around here have been reduced and most of the houses that sold are selling below asking. Also, a lot of them are sitting awhile on the market, or being pulled off the market when they don't sell fast enough.

The only places experiencing "irrational" appreciation are those with mortgages. Undervalued markets where mortgages are unavailable have gone up quite a bit, but not to the "irrational" level. Mortgage interest rates have been lower than at any time in my lifetime since I was a baby, and I believe this was intentional and politically motivated. "Throwing cash out of helicopters" masked a truly frightening global economy's inherent dangers. How do you tell someone in the US or Germany or Britain that he or she makes too much money? It's not politically popular - so you create inflation and devaluations that try to compensate for the imbalances. Unfortunately for the "developed" world the "developing" world (China, et al.) didn't go along with the game and insisted on keeping exchange rates that favored their exports. Now, after several corporate implosions, wars, energy insanity, and other mismanagement by most in power (Dems and Reps included) the "developed" world is hopelessly in debt and the only way out of massive defaults and depression is hyperinflation. Which way it goes will determine whether real estate is in a "bubble" or was a smart hedge against hyperinflation. And we don't have a say, the central banks will determine the outcomes.